EU exec says euro states can have more time to cut deficits

Published February 14, 2013

| Reuters

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BRUSSELS – Euro zone countries can have extra time to meet deficit-cutting goals if the growth outlook deteriorates, the EU's top economic official has told finance ministers, as data signaled the bloc is mired in recession.

Olli Rehn's comments, in a letter to European Union finance ministers dated Wednesday and posted on the Commission website, came just as France admitted it was likely to miss this year's deficit goal of 3 percent of GDP as its economy flounders.

It has been suggested the Commission may give countries such as France and Spain an extra year - until 2014 - to meet their deficit targets.

Data on Thursday showed both German and French GDP shrank more than expected in the last quarter of 2012, putting the euro zone economy on a shaky footing going into 20123.

The bloc as a whole slipped further into recession over the same period, contracting 0.6 percent in the fourth quarter after a 0.1 percent fall in GDP Q3, although economists expect growth to pick up towards the second half of this year. The fourth-quarter figure was worse than the -0.4 percent forecast by economists in a Reuters poll.

With many euro zone countries struggling to meet their nominal deficit targets, Rehn said it was more important to focus on structural deficits, which reflect the underlying shortfall not affected by the swings in the business cycle.

"If growth deteriorates unexpectedly, a country may receive extra time to correct its excessive deficit, provided it has delivered the agreed structural fiscal effort," Rehn said.

The European Commission is due to publish its latest economic forecasts on February 22, figures that member states will take into account when they send their deficit-reduction plans to Brussels.

Rehn, the EU's Economic and Monetary Affairs Commissioner, said the economic weakness was largely due to deleveraging after the build-up of private and public debt during the credit boom of the previous decade.

But he stressed that EU public debt had risen to 90 percent of GDP from 60 percent and that it was vital to bring this level down for sustainable growth.

"When public debt levels rise above 90 percent they tend to have a negative impact on economic dynamism which translates into low growth for many years," he said.